There have been a few excellent articles and studies on provider consolidation – and how much this impacts the overall costs of health care costs.

Kaiser Health News and NPR aired a 7 minute piece on Saturday demonstrating the impact of Sutter Health System in northern California. It’s almost impossible for major insurance companies to sell policies for products that don’t include Sutter, which receives reimbursement that is now 37% higher than other providers in the area. Sutter has a profit margin of over 17% - far out of line with most profit or nonprofit hospital systems across the country. An insurance broker demonstrated that a small business with 20 employees could save $120,000 per year by purchasing health insurance that did not include Sutter. But he can find few takers for this type of limited network.

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The Center for the Study of Health System Change published a study of 8 markets (including northern and southern California) showing that four large national health insurers pay hugely variable amounts for the health care they provide to their members. In Los Angeles, the average commercial (employer-sponsored) health plan pays 118% of Medicare for inpatient care. However, the 25%ile hospital receives 84% of Medicare payment, the 75%ile hospital receives 168% of Medicare, and the highest paid hospital receives over four times Medicare payment.

The Boston Globe noted last week that Massachusetts Attorney General Martha Coakley has promised to revisit the issue of provider market clout, worrying that proposed payment reform is not enough. However, as the Center for Health System Change noted, once there are widely different allowed charges among facilities, it will be very hard indeed to roll these back.

The New York Times published an article today noting increasing consolidation of hospitals, ambulatory care centers and physicians. The article outlines the fear that as providers establish accountable care organizations to service Medicare under health care reform, their influence will grow even larger, as will their ability to extract high prices.

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OK – that’s the doom and gloom. In our class last week, we saw a graphic showing that hospitals have MUCH less consolidation (at least according the US census bureau) than health insurers. Physicians have less consolidation than just about everyone except for florists. So- this means there is no problem, right?

Wrong!

Health care delivery is hyperlocal. Sutter has very high prices and very high margins, and Sutter has high market penetration and importance in its limited geography. It doesn't matter that Sutter provides under 1% of all health care delivery in the US, while United HealthCare is responsible for insuring 70 million Americans. In Northern California, Sutter has far greater dominance than any health plan, and is able to use that to drive very high prices. Limited or tiered networks can exert at least some downward pressure on these prices.